Madagascar Overview

After 5 years of political stalemate and a mediation process led by the Southern African Development Community (SADC), presidential and legislative elections took place in Madagascar at the end of 2013. Mr. Hery Rajaonarimampianina was elected president and took office on January 25, 2014. On April 11, Roger Kolo was appointed Prime Minister with the support of 12 political parties in the National Assembly. A new Government, made of 31 Ministers and State Secretaries, has been formed.

Many international partners, who didn’t recognize the High Authority of Transition that had come to power in 2009 through unconstitutional means, have normalized their relations with Madagascar, in light of the last elections. The Government identifies the “fight against poverty through inclusive growth” as its main objective; a strategy based around 3 pillars: improved governance, economic recovery, and expansion of access to basic social services.

Economic Overview

Growth slowed in 2013 to 2.4%, down from 3% in 2012 compared to a pre-crisis average of 5% (2004-2008).Growth in 2013 was mainly sustained by export-oriented activities in the mining sector and exports from the export processing zones. The agricultural sector contracted due to natural disasters (locust infestation and cyclones), and the tourism sector underperformed also.

Growth is projected to recover to 3% in 2014 as the agricultural sector recovers, but a large pick-up is unlikely unless investments increase from the current level of below 30% of GDP. This would require an increase in investor confidence. A natural rebound after the prolonged crisis has not taken place yet. Faster growth is necessary to make a dent in the elevated rate of extreme poverty, estimated at 82% of the population (US$1.25, PPP threshold).

Current account deficit declined to 5.6% of GDP in 2013, owing to strong exports, especially of nickel and cobalt. Imports of investment-related equipment slowed as the investment phase of a large mining project came to a close. The improvement in current account did not translate into net improvement in the overall balance of payment position, as it was accompanied by a reduction in FDI inflows, and non-repatriation of export proceeds.

International reserves declined from 3.3 months of import cover in 2012 to 2.2 months in 2013, and seem to have stabilized since. Madagascar has a floating exchange rate regime. The local currency, Ariary, has been depreciating gradually, reflecting the higher rate of inflation than its main trading partners, the euro zone and the US.

Fiscal deficit is expected to increase from 2% of GDP in 2013 to 3.5% in 2014, as the authorities depart from the extremely prudent stance and increase expenditure to take advantage of the resumption in external aid flow. The Government is planning to reorient its expenditures towards pro-poor spending, beginning with the supplementary budget for 2014, adopted in August. During the political transition, the wage bill, fuel subsidies and transfers to the state-owned electricity and water company, JIRAMA, represented the bulk of the expenditures, to the detriment of social and development spending. The authorities have declared its intention of phasing out the fuel subsidies, and of improving the financial efficiency of JIRAMA. The authorities have also resumed their efforts to mobilize more revenues with technical assistance of development partners, including the Bank and the IMF.

Madagascar ranked 155 out of 187 countries and territories in the 2014 Human Development Report. At this point, the country will not reach the UN Millennium Development Goals (MDG) by 2015. In particular, the MDGs for child mortality, primary education net enrollment and completion rates, and especially the eradication of extreme poverty, which in 2007 was deemed potentially achievable, can no longer be achieved. The country continues to rank poorly on the ease of doing business (148/189 in Doing Business 2014).

Madagascar’s economy is very fragile and its capacity to absorb further shocks is at a bare minimum. Being an open economy, Madagascar is particularly vulnerable to developments in the euro zone, to which Madagascar is particularly exposed—through 80% of its tourism earnings, 50% of its exports of goods, 15% of its foreign direct investment (FDI), and other channels.

Madagascar is also highly vulnerable to natural disasters—including cyclones, droughts and flooding. It is estimated that one quarter of the population, representing five million people, currently live in zones at high risk of natural disasters. In 2008, cyclones caused economic losses equivalent to 4% of GDP.

The World Bank has been partnering with Madagascar since September 1963. Its activities are currently framed by an Interim Strategy Note in effect since February 2012. It authorized “emergency-type” operations to go forward to help address some of the most urgent needs in health, nutrition and education, respond to crises (e.g., natural disasters), and finance the rehabilitation of some essential infrastructure.

The country was not in a position to warrant the preparation of a new Country Partnership Strategy (CPS) due to the implementation of operational procedure OP 7.30 (dealing with de facto governments) from March 2009 to January 2014. A new strategy will be prepared in the coming year to frame the World Bank activities. The election of a new President of the Republic triggered the normalization of the relationship between the World Bank and Madagascar. A new Country Partnership Framework will be prepared in the coming year to frame the World Bank Group activities.

The Bank’s portfolio in Madagascar is composed of 8 lending operations with a total commitment of $568.2 million of which $ 358.8 million has already been disbursed. It comprises also 9 Recipient-executed Trust Funds with a total commitment of $ 133. 3 million of which a level of $ 35.1 million has already been disbursed.

In recent years, the Bank has continued to develop an outstanding program of analytical work and to develop new partnerships. The flagship of our knowledge program has been the completion of a collection of 18 Policy Notes covering all sectors and putting together a wealth of knowledge accumulated by the Bank over the last decade of engagement in Madagascar. This collection was officially launched in May 2014. Each of these Notes has been widely discussed with various stakeholders including private sector, civil society, academia and ministerial technical level. In addition, the Bank has completed selected pieces of major sector work in areas such as political economy of governance and aid effectiveness, health and nutrition, urbanization and agriculture marketing.

The Bank’s assistance strategy aims to deliver results on the ground in terms of increased investments and growth as well as improving social indicators. Our program has been able to improve lives in some of the following ways:

Countrywide, 5,550 community nutrition sites were established where over one million children under five (about one-third of all children under five-years-old in the country) are regularly weighed and mothers are counseled on the progress of their children;

100% growth of the traffic at the Ehoala Port, partially financed by the World Bank in the South-East;

60,000 people in Fort-Dauphin have now access to potable water;

100,000 land certificates were delivered since 2006;

400,000 people benefited from cash for work projects;

114 rural health centers got electricity;

2,280 kilometers or roads were rehabilitated from 2006 to 2011;

Rice productivity doubled in the zones where the World Bank is intervening;

5,000 poor families representing 16,000 children received conditional cash transfer to support their health care and education;

An additional ten percent of the population can now have access to mobile telephony as the WB helped finance the installation of telecom towers in those remote regions.

In the environmental field, the World Bank and a large number of development partners have worked together since 1990 in support of Madagascar’s National Environmental Action Plan (NEAP). This Plan was implemented in the form of a three-phase US$400 million Environment Program (EP). The engagement has yielded substantive results, including among others:

75% reduction in the rate of deforestation over the past 20 years;

Creation of 2.4 million hectares of national parks;

Sustainable management of 4.5 million hectares of landscapes, primarily by non-governmental organizations (NGOs).

Before the 2009 – 2013 political crises, external aid represented 40% of the government’s budget and 75% of public investments. Madagascar’s four biggest donors (The World Bank, the European Commission, the United States and the African Development Bank) accounted for about 80% of official aid to the island.

During the political crisis, most donors put on hold new commitments while continuing existing humanitarian programs that are being channeled through specialized agencies or non-governmental organizations (NGOs). In light of the recent political developments, all donors are now reconsidering their assistance programs to Madagascar, including through new commitments.